ECON1123-CH14-MONOPOLY

monopolist

A monopolist is a firm that is the only one producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.

profit-maximizing

it is profit-maximizing to charge higher prices to low-elasticity consumers and lower prices to higher-elasticity ones.

price regulation

price regulation limits the price that a monopolist is allowed to charge.

barrier to entry

to earn economic profit, a monopolist must be protected by a barrier to entry--something that prevents other firms from entering the industry.

quick review 1

the crucial difference between a firm with market power, such as a monopolist, and a firm in a perfectly competitive industry is that perfectly competitive firms are price-takers that face horizontal demand curves, but a firm with market power faces a downward sloping demand curve. Due to the price effect of an increase in output, the marginal revenue curve of a firm with market power always lies below its demand curve. So a profit-maximizing monopolist chooses the output level at which marginal cost is equal to marginal revenue-not to price. As a result, the monopolist produces less and sells its output at a higher price than a perfectly competitive industry world. It earns a profit in the short run and the long run.

Q9

A monopoly exists when there is only one firm in an entire industry. Therefore, the firm is a price maker, meaning the monopolist has some control over the market price. Because a monopolist is the only firm in an industry, there are no close substitutes available. Monopolists are able to maintain this position due to significant barriers to entry into the industry.

public ownership

In public ownership of a monopoly, the good is supplied by the government or by a firm owned by the government.

RENT SEEKING

DEFINITION of 'Rent-Seeking' When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation. Incorrect. By fighting for tariffs within the industry, this firm is reducing foreign competition. This change allows firms to earn profits more easily. DEFINITION::: Rent-seeking behavior describes actions by firms to reduce competition and enhance their profitable position. Lobbying Congress, fighting for tariffs, and incurring legal fees in antitrust suits are all examples of spending used to protect a firm\'s monopoly power.

q6

Incorrect. A natural monopoly occurs when one firm can produce at a lower average cost than several smaller firms due to economies of scale. Which graph here shows economies of scale? Double-check your other choices too. Incorrect. Single price monopolists produce the quantity where MR=MC. Which firm earns a profit of $2 when producing a quantity of 2? Double- check your other choices too. Natural Monopoly: The bottom left graph shows a regulated natural monopoly that is earning zero economic profit. A natural monopoly occurs when economies of scale lead to one firm being able to produce at a lower average cost than could several smaller firms. Tap water is an example of this kind of a good, where the large fixed costs associated with cleaning/processing water and constructing a piping system imply that the lowest-cost method to produce the good is with one firm. The bottom left graph is the only one showing a declining average cost curve, indicating that this is the natural monopoly. Perfect Price Discriminating Monopoly: Perfect price discrimination occurs when firms charge each person the absolute most that they would be willing to pay for the good. As the demand curve shows the most that consumers will pay, the demand curve for these types of firms is also marginal revenue curve. Profit is the area between the demand curve and the average total cost curve for all units. Profit for the firm characterized by the bottom right graph is $12.50 (calculated as 1/2($9-$4)(5)) indicating that this is the perfect price discriminating firm. Single Price Monopoly: The single price monopolist is shown in the top right graph. At the profit maximizing output of 2, the firm is able to charge a price of $7 and has an average total cost of $6 (these are the heights of the demand curve and average total cost curve, respectively, at the quantity of 2). Subtracting the cost from the price that the firm gets for each unit and multiplying by the number of units sold leaves this firm with a profit of $2. Price Discriminating Monopoly: The top left graph shows the firm can charge some people $8 and others $6. Knowing that the firm is earning a profit of $5 is critical here because this is only way to conclude that top left graph shows the price discriminating firm. To calculate profit here, add the profit that the firm gets for units sold at each price. At a price of $8, the demand curve shows that the firm can sell 1 unit. The cost of this first unit is $5, meaning the firm profits $3 from units sold at the higher price. Lowering the price to $6, the firm sells two more units at an additional cost of $5 each. The firm therefore earns an additional $2 of profit on units sold for $6. Add the profit for all of the units sold for firms\' total profit of $5. The top left graph is only one in which a firm charging these two prices will earn $5 of profit. DECLINING AVERAGE COST CURVE = NATURAL MONOPOLY

q2

Price discriminators want to charge higher prices to people with less elastic demand, so the vending machine operators must think that late-night customers have less elastic demand than do daytime customers. If vending machine customers thought that late-night customers were more likely to bring food from home and thus not need food from a vending machine, this would lead them to believe that late-night customers actually have more elastic demand. As such, the actual reasoning behind the belief of less elastic demand must be different. This leaves only one possible answer: late-night customers are believed to have less elastic demand because they have access to fewer restaurants and other stores and thus have access to fewer substitute goods.

q5

To maximize the profits, the firm should restrict the number of trips to the point where the marginal revenue curve intersects with the marginal cost curve (MR=MC). Observe that by using this rule, BlueSky Airlines will sell 300 trips to vacation travelers and 200 trips to business travelers. BlueSky will charge the most it can, while selling the quantities determined by the height of the demand curve. For vacationers, the height of the demand curve is $200, when the quantity equals 300. For business travelers, the height of the demand curve is $300 at a quantity of 200. Note that: Graphically, the height of the shaded region is the price, or $200 for vacationers and $300 for business travelers. For both customer types, AC=MC=$100. So the base of the shaded rectangle will extend down to $100. The width of the rectangle is determined by the quantity sold for vacationers and business travelers, or 300 and 200, respectively. Therefore, the profits for vacationers are: ($200 - $100) * (300 - 0) = $100 * 300 = $30,000. And the profits for business travellers are: ($300 - $100) * (200 - 0) = $200 * 200 = $40,000.

a natural monopoly

a natural monopoly exists when increasing returns to scale provide a large cost advantage to a single firm that produces all of an industry's output.

patent

a patent gives an inventor a temporary monopoly in the use or sale of an ivention

single-price monopolist

a single-price monopolist offers its product to all consumers at the same price

quick review 2

by reducing output and raising price above marginal cost, a monopolist captures some of the consumer surplus as profit and causes deadweight loss. To avoid deadweight loss, government policy attempts to prevent monopoly behavior. When monopolies are "created" rather than natural, governments should act to prevent them from forming and breaking up existing ones. Natural monopoly poses a harder policy problem. One answer is public onwership, but publicly owned companies are often poorly run. A common response in the US is price regulation. A price ceiling imposed on a monopolist does not create shortages as long as it is not set too low. There always remains the option of doing nothing; monopoly is a bad thing, but the cure may be worse than the disease.

market power

market power is the ability of a firm to raise prices

perfect price discrimination

perfect price discrimination takes place when a monopolist charges each consumer his or her willingness to pay-the maximum that the consumer is willing to pay

q1

profit maximization occurs where MR=MC When a monopolist can only charge one price, a monopolist\'s profit maximizing quantity is then, as for competitive firms, the quantity and price where MR=MC. Profit is then bound by the rectangle between this quantity and the difference of price and ATC. Under perfect price discrimination, however, firms can charge each consumer the maximum that consumer is willing to pay, maximizing their profits to everything bound under the demand curve and above MC = ATC. Price discrimination thus allows a firm to increase their profits.

price discrimination

sellers engage in price discrimination when they charge different prices to different consumers for the same good.

copyright

a copyright gives the creator of a literary or artistic work sole rights to profit from that work.

Q14 WESTION!

Natural Monopoly: A natural monopoly is an industry where the scale economies of a single firm are not exhausted by the demand for the product. That means that the demand crosses the long run average cost curve on the downward-sloping portion. A single producer is the most efficient way to produce the good. Any additional producers would increase average cost. Profit-maximizing quantity: The profit-maximizing quantity is given by the intersection of the marginal revenue and marginal cost curves. Because we know that MC crosses AC at the minimum of AC, and AC is decreasing, MC must be below the AC curve. So, MR must also be below AC at the quantity where profit is maximized.

Q13

Natural monopolies occur when the economies of scale associated with production are such that one firm can provide the good at a lower average cost than can multiple firms. Economies of scale describe the situation where average cost of production falls as output increases. Production processes with relatively high fixed costs are often associated with economies of scale. Here, the firm providing electricity for Los Angeles is most likely to be a natural monopoly. There are many up-front costs associated with providing electricity (e.g., the development of a power plant, the development of power lines to get power to customers). After these fixed costs are accounted for, the marginal cost of providing electricity is relatively low. Given this characterization of the costs of the firm, the cheapest way to provide electricity is to have only one firm go to expense of developing the infrastructure needed to provide the good.

Q10

Perfect Competition: In any market, consumer surplus and producer surplus depend on market price. To find consumer surplus in a perfectly competitive market, find the equilibrium price and compare it to the demand curve. The area below demand and above the equilibrium price is consumer surplus. To find producer surplus in a perfectly competitive market, find the equilibrium price and compare it to the supply curve. The area above the supply curve and below the equilibrium price is producer surplus. In most graphs these will both be triangles. Total surplus, the sum of consumer and producer surplus is maximized in a perfectly competitive market. Therefore, there is not deadweight loss or loss of economic efficiency in a perfectly competitive market. As with a perfectly competitive market, producer and consumer surplus are dependent on market price. However, the market price is derived by finding the optimal quantity supplied and price charged by the monopolist. The monopolist maximizes profits where marginal revenue (MR) of the final output equals marginal cost (MC) of the final output. The graph includes both of these lines and the optimal quantity can be found where these two line intersect. Since monopolists have market power, they are able to charge a price greater than their marginal cost. To find optimal price, find the price on the demand curve associated with the optimal quantity. Monopoly: Consumer surplus in a monopoly is found in the exact same way as in a perfectly competitive market. The area below the demand curve and above the market price is consumer surplus. Producer surplus is the area below price and above the supply curve. For a monopolist, the supply curve is equal to its marginal cost curve. The area above the marginal cost curve and below the price is producer surplus. Since the monopolist does not produce output greater than MR equal to MC, the producer surplus does not include the area to the right of the optimal quantity and below price. This area is a loss of economic efficiency compared to the perfectly competitive market and is referred to as DWL. Because monopolies exhibit a DWL, they do not maximize total surplus in the market and are therefore less efficient than a perfectly competitive market.

q4

Price Discrimination: In general price discrimination is when firms charge different prices to different consumers for the same product. The airline, hotel, and restaurant are all engaging in price discrimination. Perfect price discrimination is when the firm not only charges each customer a different price, but also charges each the absolute most that they would be willing to pay. Of course, it\'s unlikely that firm would know exactly how much each person would be willing to pay for a good (except for psychics), so perfect price discrimination does not typically occur. The principle, in the case of perfect price discrimination, is that price-discriminating firms profits increase since they have more information about various consmers\' demand for their product. The demand curve indicates the highest price that consumers are willing to pay for various quantities. The perfectly price discriminating firm therefore charges a price equal to the demand curve, for all units that are profitable to produce. The firms cost can be identified by multiplying the average total cost (ATC) by the number of units produced. The area under the demand curve and above the ATC for all units produced represents the firm\'s profit. Profit for this firm is calculated like this:

Q12

Price Discrimination: In order for Bree to successfully price discriminate, 1. she must face a downward-sloping demand curve. The downward-sloping demand curve means she has market power and thus can set the price of her product without risking all of her current sales. 2. She must also be able to identify at least two groups of consumers that have differing price elasticities of demand. This information allows for the determination of what price to charge which group. The group with the most elastic demand receives the lower price and the group that is less sensitive to price changes pays the higher price. Finally, 3. Bree must be able to prevent selling between her customers. If she cannot prevent this type of selling, the customer who pays the lower price will buy the fishing tackle and sell it to the group who is willing to pay the higher price. It follows that you must know about Bree\'s ability to prevent the selling between groups to determine if she can successfully price discriminate.

q3

Price Discrimination: Price discrimination occurs when firms charge different consumers different prices for the same good. This is legal and happens frequently under the right circumstances. For example, airlines price discriminate by charging customers different fares depending upon when they purchase their ticket. The ability to price discriminate lets firms charge higher prices to people who are willing to pay more for a good. This increases their ability to earn profits, so firms will price discriminate if they can. Firms without market power can\'t price discriminate. Therefore, perfectly competitive firms never can price discriminate while firms in other market structure sometimes can, provided that other conditions are met. Perfect Price Discrimination: Perfect price discrimination occurs when firms not only charge different consumers different prices, but also charge each person the maximum that they would be willing to pay for a good. This is rare because firms typically don\'t have perfect information about how much each person is willing to pay.

Q8

Total revenue is price multiplied by the quantity sold, so at a price of $100, 20 jackets are sold, so total revenue equals $2,000. Similarly, when the price falls to $98, 21 jackets are sold, so total revenue equals $2,058. Marginal revenue is the change in total revenue resulting from the sale of the last unit. The marginal revenue generated from selling the 21st jacket is $58. This is the difference between total revenue when selling 20 jackets versus selling 21 jackets. Firms facing a downward sloping demand curve who are unable to price discriminate will find that the marginal revenue is always less than price, as found in this example. Since the monopolist must charge $98 for all 21 jackets sold, he misses the opportunity to sell 20 jackets for $100 each.